Suppose a country has a consumption tax that is similar to a provincial sales tax. If its government eliminates the consumption tax and replaces it with an income tax that includes an income tax on interest from savings, what would most likely happen?
A) Both the interest rate and saving would decrease.
B) The interest rate would decrease, and saving would increase.
C) The interest rate would increase, and saving would decrease.
D) Both the interest rate and saving would increase.

Question

Quizplus · Accepted Answer

If a consumption tax is eliminated and replaced with an income tax on interest from savings, people would have less incentive to save their money. Lower saving means less funds available for investment, and with less money being invested, interest rates would increase. Therefore, the interest rate would increase and saving would decrease, making option C the correct choice.

Suppose a Country Has a Consumption Tax That Is Similar